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South Asia Investor Review is focused on reporting, analyzing and discussing the economy and the financial markets of countries in South Asia, including Pakistan, Bangladesh and Sri Lanka. For investors looking to invest in emerging markets beyond BRIC countries (Brazil, Russia, India and China), this blog is designed to help international investors looking to learn about investing in South Asia with focus on Pakistan. Riaz has another blog called Haq's Musings at http://www.riazhaq.com

Pakistan Middle Class Larger & Wealthier Than India's

Pakistan’s middle class consists of over 6.27 million adults, according to wealth criteria used by Credit Suisse in its Global Wealth Report 2015. It represents 5.7% share of Pakistan’s total adult population of 111 million, almost twice as large as India’s middle class made up of 3% of its adult population based on the same criteria.

Average ($4,459) and median ($2,216) wealth figures for Pakistani middle class adults are higher than average ($4,352) and median ($868) wealth figures for their Indian middle class counterparts. It's a consequence of lower income wealth inequality in Pakistan compared to its neighbor. For comparison, only 1.1% of Bangladesh adult population qualify as middle class. Their average wealth is $2,201 and median wealth $1,102 per adult.

Credit Suisse said Pakistan's middle class is the 18th largest and India's 8th largest in the world. The report says 14% of world adults qualify as middle class in 2015 and they own 32% of the world's wealth. 6.7 million Pakistani adults make up 0.9% of the world's middle-class adult population. China tops the list with 108.7 million, followed by the United States 91.8 million and Japan 62 million.

A little more than 90% Pakistani adults had wealth less than $10,000 in 2015. The share of Pakistani adults with wealth between $10,000 and $100,000 in 2015 was 9.8% while only 0.1% adults owned wealth in the range of $100,000 and $1 million, the report revealed.

Even though Pakistan's GDP growth has been relatively low compared to India and Bangladesh in recent years, the country's middle class has continued to grow rapidly. It's explained as follows: It's not the overall GDP growth and average per capita income and wealth increases but the median per capita income and wealth growth that tells you how the GDP gains are shared among the population.

Data shows that economic gains in Pakistan are shared better than India and Bangladesh because of lower inequality. Income poverty rate (those below $1.25 per capita per day) in India is 33% and Bangladesh 43% versus 13% in Pakistan, according to WB data on povcalNet. Gini Index for India is 33, Pakistan 29 and Bangladesh 32, indicating that Pakistan has lower inequality.

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THERE is a visible demographic shift in Pakistan. We have been experiencing steady growth in an aspiring middle class and not just in terms of absolute numbers. Despite lacklustre growth during the last decade, the middle class has grown faster than the country’s population and nowhere has its growth and broadening been as sharp as in Punjab, especially central Punjab and the Potohar belt. Both areas are characterised by a less skewed distribution of land holdings and a more educated and skilled labour force.

How do we define ‘middle class’? It is a variable and nebulous term. The numbers or size of this class changes according to an economic or sociological definition. It is inaccurate to generalise, because the middle class is not homogenous in character. Although some values and characteristics are common for all segments that make up this class, there are differing worldviews.

In economic terms, it can be defined on the basis of incomes, consumption, and ownership of select durable assets, say the type of house one has, (all three being linked). A workable definition by the economist is that the middle class refers to people who have approximately one-third of their income available to spend after meeting their basic needs of food and shelter.

In sociological terms, it can be defined by occupation, occupational level, education or self-identification, the latter reflecting a sense of self-ascription: one belongs to the middle class because one envisions a middle-class lifestyle and identity for oneself. It is the class of seekers and strivers putting in the most effort for change in search of a secure future. For instance, they want to educate their girls for better marriage prospects in mobile, upwardly families, which would enable better social connections. For this upward mobility, migration to urban areas is an important strategic move.

Government policies and the nature and level of spending have also influenced the pace of the middle class’s creation. Recent, rapid growth in retail trade has been the most conspicuous outcome of this: new shopping malls and restaurants have emerged even in small towns, spawning a demand for a whole new set of skills, thereby further expanding its size.

In demographic terms, households at the lower end of the scale comprise a third to half the population (although our classification of the top 10pc as ‘the rich’ would be misleading by world standards). They are typically owners of small shops and workshops, middle-sized farmers, petty contractors, semi-skilled industrial and service workers and junior- or mid-level official cadre.

A substantial proportion of them are also beneficiaries of a large range of government handouts and subsidies, including water, fertiliser, higher education, wheat flour, etc. They typically own a refrigerator, more than one mobile phone, a motorbike or a small car. Although their expenditure budgets are stretched, they save for the education of their children and for their retirement.

Those at the upper end are senior government officials, managers of large businesses, bankers, professionals like accountants, tax consultants and architects, large farmers, academics in upmarket private schools and in public and private universities and those providing a whole range of services in the sectors of telecommunication, IT, media and retail and allied services, etc.

They are brand conscious, want material possessions like designer clothes, the latest car models, electronic gadgets, have air-conditioners and can afford some kind of annual vacation.

KARACHI: Local car sales (including light commercial vehicles, jeeps and vans) jumped to 54,812 units in the first three months (Jul-Sep) of fiscal year 2016, up 72% compared to 31,899 units in the same period of last year, according to data released by the Pakistan Automotive Manufacturers Association (PAMA).

It is important to note that in September 2015, despite fewer working days due to Eidul Azha, local car sales rose 45% year-on-year (YoY) to 18,424 units. They, however, declined by 10% month-on-month (MoM).

The overall healthy growth in the auto sector is indicative of an increase in per capita income, lower interest rates and overall recovery of the economy. Car financing is also picking up gradually (currently estimated at 30% versus 5% a few years ago).

To recall, car sales (excluding imported ones) in Pakistan grew at a five-year (FY11-15) compound annual growth rate (CAGR) of 5.3% to 179,953 units. While volumes surged by 31% in fiscal year 2015 (FY15) on the back of the new model of Toyota Corolla, Punjab taxi scheme and an increase in car financing due to 42-year low interest rates in the country also helped.

“We forecast local car sales to grow at 13% in FY16 to reach 203,653 units,” Topline Securities reported on Monday.

Indus Motor sold 14,767 units in 1QFY16 compared to 9,862 units in the same quarter last year. In the month of September, Indus Motor’s sales stood at 4,984 units which rose by 6% year on year. On a MoM basis, however, following the trend in Pak Suzuki, Indus sales also decreased by 10%.

Honda Cars sold 6,184 units in 1QFY16 compared to 4,887 units in the same period last year. In September, Honda Cars sold 2,001 units, up by 14% YoY, while remained flat on a MoM basis.

This Is Just How Unequal is #India with top 1% Owning 58% of Wealth. #Modi #BJP http://blogs.wsj.com/indiarealtime/2017/01/17/this-is-just-how-unequal-india-is/ … via @WSJIndia

The richest 1% of Indians hold 58% of the country’s total wealth, according to Oxfam India.

The stark inequality in India is worse than the global data put out by the organization, which show that the richest 1% have more than 50% of the total world wealth, Oxfam said.

The anti-poverty advocacy group released a report, “An Economy for the 99%” this week to coincide with the meeting of some of the world’s wealthiest business leaders and most powerful policymakers in Davos, Switzerland.

It said recently improved data on the distribution of wealth, particularly in countries like India and China, indicate that the poorest half of the world has less wealth was previously thought. Oxfam singled out India repeatedly in the report.

It said that companies are increasingly driven to pay higher returns to their shareholders. In India, the amount of profits corporations share with shareholders is as high as 50% and growing rapidly, the report said.

The report said the annual share dividends paid by from Zara’s parent company to Amancio Ortega – the world’s second richest man – are equal to around 800,000 times the annual wage of a worker employed by a garment factory in India.

Oxfam said that the combined wealth of India’s 57 billionaires is equivalent to that of the country’s poorest 70%.

“India is hitting the global headlines for many reasons, but one of them is for being one of the most unequal countries in the world with a very high and sharply rising concentration of income and wealth,” Nisha Agarwal, chief executive of Oxfam said in a statement.

Oxfam said India should introduce an inheritance tax and raise its wealth levies as well as increasing public spending on health and education. It said it should end the era of tax havens and crack down on rich people and corporations avoiding tax.

BBC News - #Inequality in #India is the highest level in 92 years. Top 1% take 22% of income. Top 1% own 58% wealthhttp://www.bbc.com/news/world-asia-india-41198638#

New research by French economists Lucas Chancel and Thomas Piketty, author of Capital, the 2013 bestselling book on capitalism and increasing inequality, clearly points to this conclusion.They studied household consumption surveys, federal accounts and income tax data from 1922 - when the tax was introduced in India - to 2014.The data shows that the share of national income accruing to the top 1% of wage earners is now at its highest level since Indians began paying income tax.The economists say the top 1% of the earners captured less than 21% of the total income in the late 1930s, before dropping to 6% in the early 1980s and rising to 22% today. India, in fact, comes out as a country with one of the highest increase in top 1% income share concentration over the past 30 years," they say.

To be sure, India's economy has undergone a radical transformation over the last three decades.Up to the 1970s, India was a tightly regulated, straitlaced economy with socialist planning. Growth crawled (3.5% per year), development was weak and poverty endemic.Some easing of regulation, decline in tax rates and modest reforms led to growth picking up in the 1980s, trundling at around 5% a year. This was followed by some substantial reforms in the early 1990s after which the economy grew briskly, nudging close to double digits in the mid-2000s.

Growth has slowed substantially since then, but India still remains one of the fastest-growing economies in the world. The ongoing slowdown - growth was 5.7% in the April-June quarter, the slowest pace in three years - largely triggered by feeble demand, a controversial cash ban, declining private investment and weak credit growth, is a cause for concern.And the need for fast-paced growth, according to Nobel Prize winning economist Amartya Sen, is "far from over since India, after two decades of rapid growth, is still one of the poorest countries in the world".From their latest work on income inequality, Lucas Chancel and Thomas Piketty contend that there has been a "sharp increase in wealth concentration from 1991 to 2012, particularly after 2002". Also, they conclude, India has only been really shining for the top 10% of the population - roughly 80 million people in 2014 - rather than the middle 40%.The economists plan to release the first World Inequality Report, produced by a network of more than 100 researchers in December, where they will compare India's inequality with other countries and suggest ways to tackle it.Striking transitionThey agree that unequal growth over a period of time is not specific to India, but market economies are not bound to be unequal. India's case is striking in the fact that it is the country with the highest gap between the growth of the top 1% and that of the full population. Incomes of those at the very top have actually grown at a faster pace than in China.The economists contend that the growth strategy pursued by successive governments has led to a sharp increase in inequality. China also liberalised and opened up after 1978, and experienced a sharp income growth as well as a sharp rise in inequality. This rise was however stabilised in the 2000s and is currently at a lower level than India.In Russia, the move from a communist to a market economy was "swift and brutal" and today has a similar level of inequality to India."This shows that there are different strategies to transit from a highly regulated economy to a liberalised one. In the arrays of possible pathways, India pursued a very unequal way but could probably have chosen another path," Dr Chancel told me.

Giving a scary picture of inequalities in India, the recently-released “Global Wealth Report 2017”, published by Credit-Suisse, a Swiss multinational financial services holding company, headquartered in Zurich, has said that India’s 92% of adults “have net worth less than USD 10,000”, while “a small fraction of the population (just 0.5% of adults) has a net worth over USD 100,000.” While the 0.5% adult population of India “translates into 4.2 million people” because of its huge population, the report says, “By our estimates, 1,820 adults have wealth over USD 50 million, and 760 have more than USD 100 million.” A further breakup of wealth among the top echelons reveals that 10% of the adult population has 73.3% of wealth, 5% has 64.1% of wealth, and 1% has 45.1% of wealth.

In absolute numbers, the report says, as of mid-2017, 770,089,000 adult individuals have a wealth range of under USD 10,000, 60,116,000 have a wealth range between USD 10,000 and 100,000, 4,158,000 have wealth range between USD 100,000-1 million, and 245,000 individuals have wealth more than USD 1 million.

Pointing out that “while wealth has been rising in India, not everyone has shared in this growth”, the report’s data show that India’s Gini index – an internationally recognized, most commonly used measure of inequality, with 100% representing maximal inequality – is found to be 83%. By comparison, Pakistan’s Gini index is 52.6%, Bangladesh’s 57.9%, Sri Lanka’s 66.5%, Nepal’s 67.3%, and China’s 78.9%

For all the talk of wanting to tap the middle class, no firm moving into India thinks it is targeting the middle of the income distribution. India’s mean GDP per head is just $1,700, and 80% of the population makes less than that. Adjust for purchasing-power parity by factoring in the cheaper cost of goods and services in India and you can bump the mean up to $6,600. But that is less than half the figure for China (see chart 2) and a quarter of that for Russia. What is more, foreign companies have to take their money out of India at market exchange rates, not adjusted ones.

Defining the middle class anywhere is tricky. India’s National Council of Applied Economic Research has used a cut-off of 250,000 rupees of annual income, or about $10 a day at market rates. Thomas Piketty and Lucas Chancel of the Paris School of Economics found in a recent study that one in ten Indian adults had an annual income of more than $3,150 in 2014. That leaves only 78m Indians making close to $10 a day.

Meagre market

Even adjusting for the lower cost of living, that is hardly a figure to set marketers’ heartbeats racing. The latest iPhone, which costs $1,400 in India, represents five month’s pay for an Indian who just makes it into the top 10% of earners. And such consumers are not making up through growing numbers what they lack in individual spending power. The proportion making around $10 a day hardly shifted between 2010 and 2016.

Another gauge is whether people can afford the more basic material goods they crave. For Indians, that typically means a car or scooter, a television, a computer, air conditioning and a fridge. A government survey in 2012 found that under 3% of all Indian households owned all five items. The median household had no more than one. How many of them will be anywhere near able to buy an iPhone or a pair of Levi’s if they cannot afford a TV set?

To get in the top 1% of earners, an Indian needs to make just over $20,000. Adjusted for purchasing-power parity, that is a comfortable income, equating to over $75,000 in America. But in terms of being able to afford goods sold at much the same price across the world, whether a Netflix subscription or Nike trainers, more than 99% of the Indian population are in the same league as Americans that count as below the poverty line (around $25,000 for a family of four), points out Rama Bijapurkar, a marketing consultant.

The top 1% of Indians, indeed, are squeezing out the rest. They earn 22% of the entire income pool, according to Mr Piketty, compared with 14% for China’s top 1%. That is largely because they have captured nearly a third of all national growth since 1980. In that period India is the country with the biggest gap between the growth of income for the top 1% and the growth of income for the population as a whole. At the turn of the century, the richest 10% of Indians made 40% of national income, about the same as the 40% below them. But far from becoming a middle class, the latter’s share of income then slumped to under 30%, while those at the top went on to control over half of all income (see chart 3).

Hold your elephants. The Indian middle class conjured up by the marketers and consultants scarcely exists. Firms peddling anything much beyond soap, matches and phone-credit are targeting a minuscule slice of the population (see article). The top 1% of Indian adults, a rich enclave of 8m inhabitants making at least $20,000 a year, equates to roughly Hong Kong in terms of population and average income. The next 9% is akin to central Europe, in the middle of the global wealth pack. The next 40% of India’s population neatly mirrors its combined South Asian poor neighbours, Bangladesh and Pakistan. The remaining half-billion or so are on a par with the most destitute bits of Africa. To be sure, global companies take the markets of central Europe seriously. Plenty of fortunes have been made there. But they are no China.

Worse, the chances of India developing a middle class to match the Middle Kingdom’s are being throttled by growing inequality. The top 1% of earners pocketed nearly a third of all the extra income generated by economic growth between 1980 and 2014, according to new research from economists including Thomas Piketty. The well-off are ten times richer now than in 1980; those at the median have not even doubled their income. India has done a good job at getting those earning below $2 a day (at purchasing-power parity) to $3, but it has not matched other countries’ records in getting those on $3 a day to earning $5, those at $5 a day to $10, and so on. Middle earners in countries at India’s stage of development usually take more of the gains from growth. Eight in ten Indians cite inequality as a big problem, on a par with corruption.

The reasons for this failure are not mysterious. Decades of statist intervention meant that when a measure of liberalisation came in the early 1990s, only a few were able to benefit. The workforce is woefully unproductive—no surprise given the abysmal state of India’s education system, which churns out millions of adults equipped only for menial work. Its graduates go on to toil in small or micro-enterprises, operating informally; these “employ” 93% of all Indians. The great swell of middle-class jobs that China created as it became the workshop to the world is not to be found in India, because turning small businesses into productive large ones is made nigh-on impossible by bureaucracy. The fact that barely a quarter of women work—a share that has seen a precipitous decline in the past decade—only makes matters worse.

Good policy can do an enormous amount to improve prospects. However, hope should be tempered by realism. India is blessed with a deeply entrenched democratic system, but that is no shield against poor decisions. The sudden and brutal “demonetisation” of the economy in 2016 was meant to target fat cats, but ended up hurting everybody. And the path to prosperity walked by China, where manufacturing produced the jobs that pushed up incomes, is narrowing as automation limits opportunities for factory work.

All of which means that companies need to deal with the India that exists today rather than the one they wish to emerge. A strategy of waiting for Indians to develop a taste for products that the global middle class indulges in—cars as income per head crosses one threshold, foreign holidays when it crosses the next—may lead to decades of frustration. Only 3% of Indians have ever been on an aeroplane; only one in 45 owns a car or lorry. If nearly 300m Indians count as “middle class”, as HSBC has proclaimed, some of them make around $3 a day.

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The game is available on the Apple iOS App Store, Google Play, Samsung Galaxy Store, Amazon, Kongregate, and Facebook. It is now also supported on the Apple Watch.

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I am the Founder and President of PakAlumni Worldwide, a global social network for Pakistanis, South Asians and their friends. I also served as Chairman of the NEDians Convention 2007. In addition to being a South Asia watcher, an investor, business consultant and avid follower of the world financial markets, I have more than 25 years experience in the hi-tech industry. I have been on the faculties of Rutgers University and NED Engineering University and cofounded two high-tech startups, Cautella, Inc. and DynArray Corp and managed multi-million dollar P&Ls. I am a pioneer of the PC and mobile businesses and I have held senior management positions in hardware and software development of Intel’s microprocessor product line from 8086 to Pentium processors. My experience includes senior roles in marketing, engineering and business management. I was recognized as “Person of the Year” by PC Magazine for my contribution to 80386 program. I have an MS degree in Electrical engineering from the New Jersey Institute of Technology.
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